Question
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt (Kd) 10.2 % 20 % 2.04 % Preferred stock (Kp) 9.5 20
Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost
Debt (Kd) 10.2 % 20 % 2.04 %
Preferred stock (Kp) 9.5 20 1.90
Common equity (Ke) (retained earnings) 11.5 60 6.90
Weighted average cost of capital (Ka) 10.84 %
a. If the firm has $21 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
b. The 10.2 percent cost of debt referred to earlier applies only to the first $25 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").)
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